Many people understand that a pension is something to look after you in retirement. Often we are posed with the question “What is an annuity?”

Having built up a pension pot throughout your life you now need to convert that to income. There are a number of ways you can obtain an income from your fund. One way is through an annuity.

Annuities made clear

A lifetime annuity is the securest way to obtain an income from your pension fund. With an annuity, you hand your pot of money over to an insurance company, who in exchange, agree to pay you an income for life.

At the start, you must decide how you wish to receive your income.

  • Do you want to look after your spouse or children?
  • Are you concerned about inflation?
  • How often do you want paying?

You also only have one chance to get the best deal. The annuity rates offered by various providers can vary greatly. In addition, if you suffer from poor health, smoke or have suffered serious illnesses you could get even more income through an enhanced annuity, or impaired annuity.

There are also other types of annuity available on the market to suit various different situations.

What different features do annuities have?

The highest income would be from a single life, payable annually in arrears, with no guaranteed period, and level in payment. The more features and benefits you include the smaller the payment will become. Some of the additional features you can benefit from are detailed below;

Fixed term Annuities

By using a Fixed Term Annuity, you may draw between 0% to 150% of a level annuity income. This can be single life or a joint life.

Joint life Annuities

After you die the income will continue to your spouse or partner. This can be up to 100% of the value of income you received.

Escalating Annuities

Will increase in payment each year at a rate stated at outset, by an inflation index or a fixed percentage.

Guaranteed Period

Guaranteed periods ensure your estate receives certain number years payments from your pension fund. This is typically 5 or 10 years.

In Arrears or in Advance

This is when you receive your money. Arrears mean you get paid at the end of the frequency period. Advance means you get paid at the start.


The less frequently you get paid the higher the income you will receive. This is usually monthly, quarterly, or yearly.

With Proportion -(only payments in arrears)

If you die part way with though your chosen payment frequency. You will receive a partial payment for the number days you were alive prior to your death.


If you select a guaranteed period and a joint life annuity with overlap, then both the spouse’s pension and the remainder of any guaranteed payments will be paid at the same time.
Without overlap the spouse’s pension will start after the guaranteed period has ended.

Value Protection

Will payout a residual lump sum equal to the purchase price of the annuity less any payments received. This payment will be subject to tax at the rate of 55%.


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